The Middle East stirs some old worries

America is intensifying its policy against Iran in the Gulf, and challenging more EU policy over Iran and energy as well as trade.

Donald Trump has spent the last week moving markets. His decision to push back hard on China before agreeing a trade deal led to sharp sell offs in the Shanghai market and in China related stocks elsewhere. At the same time it looks as if the President is intensifying his policy against Iran in the Gulf, and challenging more EU policy over Iran and energy as well as trade. None of these moves are helpful to sentiment for shares.

The US announced it is sending a carrier strike force to the Gulf. The aim would presumably include being close to the Straits of Hormuz, the narrow water way so important to the oil trade which Iran in her more bellicose moments threatens to close. The US claimed that Iran was moving ballistic missiles in ships around the Gulf and might pose a military threat to the US and its allies. On taking office, Mr Trump pulled the US out of the six power agreement with Iran called the Joint Comprehensive Plan of Action, leaving it to France, the UK, Germany, China and Russia to salvage what they could from it. The Agreement was designed to prevent Iran developing nuclear weapons, in return for ending all trade sanctions. The President felt the Agreement should have covered a wider range of issues including Iran’s development of ballistic missiles and the alleged sponsorship of terrorism throughout the Middle East. He is not even sure the Agreement would stop Iran developing a nuclear weapon quite quickly from here.

Iran digs in

Iran has retaliated recently by demanding that the other signatories to the Agreement get rid of sanctions against Iranian oil and banking activities. The US is enforcing these sanctions for itself and asserting extra territorial power to get companies from other countries to also accept these restrictions. The US has now announced additional sanctions against Iranian iron and steel, copper and aluminium. Iran is planning to pull out of some of the clauses of the Agreement immediately, whilst threatening to suspend all the rest in two months’ time if the sanctions have not been lifted. It is very unlikely the other signatories will be able to persuade the US to come back on board and help them lift all sanctions. This means Iran may well build or keep a larger stockpile of enriched fissile material and do what it can to shorten the time to having a nuclear weapon capacity of its own as well as continuing with its ballistic missile programme which was outside the scope of the Agreement.

Mr Trump appears to be sending out messages to Russia about possible better relations, now that the inquiry into Russian involvement in the election has been published. When he came to office it seemed he wanted to try to find a better way to live alongside Russia without confrontation, but political realities and Democrat pressures prevented such a move. In one sense an easing of tension with Russia could be seen as good news, but the Western establishments will worry that it may send the wrong message to Russia and facilitate more Russian actions in places like the Middle East that are not in the West’s interest. It seems today that Russia is allowing the assault on Idlib province in Syria in the name of dealing with the last elements of ISIS resistance in that war torn country.

US-EU relations strained

The decision of Mike Pompeo, US Secretary of State, to stand up his scheduled meeting with Angela Merkel and to divert to Iraq to shore up a crucial US ally in the Middle East was a timely reminder of the residual importance of the Middle East to US foreign policy and of the poor relationship with Germany and the wider EU. Mr Pompeo’s pubic message in the UK included urging Germany not to continue with a second gas pipeline making the EU more dependent on Russian gas. The US does not see the Middle East as such an important region now that it has reached energy self-sufficiency, but does continue to work with Saudi Arabia and her other main allies in the region. This in itself dictates an anti-Iranian stance.

The importance of all this to world markets is considerably less than the hiatus in the China trade talks. There is nonetheless a bearish tinge to these developments. It means a worsening US/EU relationship, now over Iran and energy policy as well as over trade, and it means continued US pressure to stop the sales of Iranian oil. We should expect more bad news on trade when President Trump reports on EU trade and the car market soon, and continued worries about oil supply for the rest of the world from a Middle East still damaged by civil wars and by US sanctions.

The above article was previously published by Charles Stanley on 9th May 2019

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